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[Federal Register Volume 77, Number 58 (Monday, March 26, 2012)]
[Rules and Regulations]
[Pages 17328-17331]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: C1-2012-3390]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 4, 145, and 147

RIN 3038-AD30

Commodity Pool Operators and Commodity Trading Advisors: 
Compliance Obligations

Correction

    Editorial Note: FR DOC 2012-3390 appearing on pages 11252-11344 
in the issue of Friday, February 24, 2012 is being partially 
republished due to numerous errors.

    1. On page 11252, in the first column, the SUMMARY section is being 
republished in its entirety.

SUMMARY: The Commodity Futures Trading Commission is adopting 
amendments to its existing part 4 regulations and promulgating one new 
regulation regarding Commodity Pool Operators and Commodity Trading 
Advisors. The Commission is also adopting new data collections for CPOs 
and CTAs that are consistent with a data collection required under the 
Dodd-Frank Act for entities registered with both the Commission and the 
Securities and Exchange Commission. The adopted amendments rescind an 
exemption from registration as a CPO; rescind relief from the 
certification requirement for annual reports provided to operators of 
certain pools offered only to qualified eligible persons (``QEPs''); 
modify the criteria for claiming exclusion from the definition of CPO; 
and require the annual filing of notices claiming exemptive relief 
under several sections of the Commision's regulations. Finally, the 
adopted amendments include new risk disclosure requirements for CPOs 
and CTAs regarding swap transactions.
    2. In 17 CFR Part 4, beginning on page 11283, in the second column, 
in 31st line of text, amendatory instructions 1-8 and their 
corresponding amendments to the Code of Federal Regulations are being 
republished as follows:

PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

0
1. The authority citation for part 4 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 4, 6(c), 6b, 6c, 6l, 6m, 6n, 6o, 12a, 
and 23.

0
2. In Sec.  4.5, add paragraphs (c)(2)(iii) and (c)(5) to read as 
follows:

Sec.  4.5  Exclusion from the definition of the term ``commodity pool 
operator.''

* * * * *
    (c) * * *
    (2) * * *
    (iii) Furthermore, if the person claiming the exclusion is an 
investment company registered as such under the Investment Company Act 
of 1940, then the notice of eligibility must also contain 
representations that such person will operate the qualifying entity as 
described in Rule 4.5(b)(1) in a manner such that the qualifying 
entity:
    (A) Will use commodity futures or commodity options contracts, or 
swaps solely for bona fide hedging purposes within the meaning and 
intent of Rules 1.3(z)(1) and 151.5 (17 CFR 1.3(z)(1) and 151.5); 
Provided however, That in addition, with respect to positions in 
commodity futures or commodity option contracts, or swaps which do not 
come within the meaning and intent of Rules 1.3(z)(1) and 151.5, a 
qualifying entity may represent that the aggregate initial margin and 
premiums required to establish such positions will not exceed five 
percent of the liquidation value of the qualifying entity's portfolio, 
after taking into account unrealized profits and unrealized losses on 
any such contracts it has entered into; and, Provided further, That in 
the case of an option that is in-the-money at the time of purchase, the 
in-the-money amount as defined in Rule 190.01(x) (17 CFR 190.01(x)) may 
be excluded in computing such five percent; or
    (B) The aggregate net notional value of commodity futures, 
commodity options contracts, or swaps positions not used solely for 
bona fide hedging purposes within the meaning and intent of Rules 
1.3(z)(1) and 151.5 (17 CFR 1.3(z)(1) and 151.5), determined at the 
time the most recent position was established, does not exceed 100 
percent of the liquidation value of the pool's portfolio, after taking 
into account unrealized profits and unrealized losses on any such 
positions it has entered into. For the purpose of this paragraph:
    (1) The term ``notional value'' shall be calculated for each 
futures position by multiplying the number of contracts by the size of 
the contract, in contract units

[[Page 17329]]

(taking into account any multiplier specified in the contract), by the 
current market price per unit, for each such option position by 
multiplying the number of contracts by the size of the contract, 
adjusted by its delta, in contract units (taking into account any 
multiplier specified in the contract), by the strike price per unit, 
for each such retail forex transaction, by calculating the value in 
U.S. Dollars for such transaction, at the time the transaction was 
established, excluding for this purpose the value in U.S. Dollars of 
offsetting long and short transactions, if any, and for any cleared 
swap by the value as determined consistent with the terms of 17 CFR 
part 45; and
    (2) The person may net futures contracts with the same underlying 
commodity across designated contract markets and foreign boards of 
trade; and swaps cleared on the same designated clearing organization 
where appropriate; and (C) Will not be, and has not been, marketing 
participations to the public as or in a commodity pool or otherwise as 
or in a vehicle for trading in the commodity futures, commodity 
options, or swaps markets.
* * * * *
    (5) Annual notice. Each person who has filed a notice of exclusion 
under this section must affirm on an annual basis the notice of 
exemption from registration, withdraw such exemption due to the 
cessation of activities requiring registration or exemption therefrom, 
or withdraw such exemption and apply for registration within 60 days of 
the calendar year end through National Futures Association's electronic 
exemption filing system.
* * * * *

0
3. In Sec.  4.7:
0
a. Revise paragraphs (a)(3)(ix), (a)(3)(x), and (b)(3) to read as 
follows:

Sec.  4.7  Exemption from certain part 4 requirements for commodity 
pool operators with respect to offerings to qualified eligible persons 
and for commodity trading advisors with respect to advising qualified 
eligible persons.

* * * * *
    (a) * * *
    (3) * * *
    (ix) A natural person whose individual net worth, or joint net 
worth with that person's spouse at the time of either his purchase in 
the exempt pool or his opening of an exempt account would qualify him 
as an accredited investor as defined in Sec.  230.501(a)(5) of this 
title;
    (x) A natural person who would qualify as an accredited investor as 
defined in Sec.  203.501(a)(6) of this title;
* * * * *
    (b) * * *
    (3) Annual report relief. (i) Exemption from the specific 
requirements of Sec.  4.22(c) of this part; Provided, that within 90 
calendar days after the end of the exempt pool's fiscal year or the 
permanent cessation of trading, whichever is earlier, the commodity 
pool operator electronically files with the National Futures 
Association and distributes to each participant in lieu of the 
financial information and statements specified by that section, an 
annual report for the exempt pool, affirmed in accordance with Sec.  
4.22(h) which contains, at a minimum:
    (A) A Statement of Financial Condition as of the close of the 
exempt pool's fiscal year (elected in accordance with Sec.  4.22(g));
    (B) A Statement of Operations for that year;
    (C) Appropriate footnote disclosure and such further material 
information as may be necessary to make the required statements not 
misleading. For a pool that invests in other funds, this information 
must include, but is not limited to, separately disclosing the amounts 
of income, management and incentive fees associated with each 
investment in an investee fund that exceeds five percent of the pool's 
net assets. The income, management and incentive fees associated with 
an investment in an investee fund that is less than five percent of the 
pool's net assets may be combined and reported in the aggregate with 
the income, management and incentive fees of other investee funds that, 
individually, represent an investment of less than five percent of the 
pool's net assets. If the commodity pool operator is not able to obtain 
the specific amounts of management and incentive fees charged by an 
investee fund, the commodity pool operator must disclose the percentage 
amounts and computational basis for each such fee and include a 
statement that the CPO is not able to obtain the specific fee amounts 
for this fund;
    (D) Where the pool is comprised of more than one ownership class or 
series, information for the series or class on which the financial 
statements are reporting should be presented in addition to the 
information presented for the pool as a whole; except that, for a pool 
that is a series fund structured with a limitation on liability among 
the different series, the financial statements are not required to 
include consolidated information for all series.
    (ii) Legend. If a claim for exemption has been made pursuant to 
this section, the commodity pool operator must make a statement to that 
effect on the cover page of each annual report.
* * * * *

0
4. In Sec.  4.13:
0
a. Revise paragraphs (a)(3)(ii)(B)(1) and (2);
0
b. Remove and reserve paragraph (a)(4);
0
c. Revise paragraph (b)(1)(ii);
0
d. Redesignate paragraph (b)(4) as paragraph (b)(5) and add new 
paragraph (b)(4); and
0
e. Revise paragraph (e)(2).
    The revisions and additions read as follows:

Sec.  4.13  Exemption from registration as a commodity pool operator.

* * * * *
    (a) * * *
    (3) * * *
    (ii) * * *
    (B) * * *
    (1) The term ``notional value'' shall be calculated for each 
futures position by multiplying the number of contracts by the size of 
the contract, in contract units (taking into account any multiplier 
specified in the contract), by the current market price per unit, for 
each such option position by multiplying the number of contracts by the 
size of the contract, adjusted by its delta, in contract units (taking 
into account any multiplier specified in the contract), by the strike 
price per unit, for each such retail forex transaction, by calculating 
the value in U.S. Dollars of such transaction, at the time the 
transaction was established, excluding for this purpose the value in 
U.S. Dollars of offsetting long and short transactions, if any, and for 
any cleared swap by the value as determined consistent with the terms 
of 17 CFR part 45; and
    (2) The person may net futures contracts with the same underlying 
commodity across designated contract markets and foreign boards of 
trade; and swaps cleared on the same derivatives clearing organization 
where appropriate; and
* * * * *
    (b) * * *
    (2) * * *
    (ii) Contain the section number pursuant to which the operator is 
filing the notice (i.e., Sec.  4.13(a)(1), (2), or (3)) and represent 
that the pool will be operated in accordance with the criteria of that 
paragraph; and
* * * * *
    (4) Annual Notice. Each person who has filed a notice of exemption 
from registration under this section must

[[Page 17330]]

affirm on an annual basis the notice of exemption from registration, 
withdraw such exemption due to the cessation of activities requiring 
registration or exemption therefrom, or withdraw such exemption and 
apply for registration within 60 days of the calendar year end through 
National Futures Association's electronic exemption filing system.
* * * * *
    (e) * * *
    (2) If a person operates one or more commodity pools described in 
paragraph (a)(3) of this section, and one or more commodity pools for 
which it must be, and is, registered as a commodity pool operator, the 
person is exempt from the requirements applicable to a registered 
commodity pool operator with respect to the pool or pools described in 
paragraph (a)(3) of this section; Provided, That the person:
    (i) Furnishes in written communication physically delivered or 
delivered through electronic transmission to each prospective 
participant in a pool described in paragraph (a)(3) of this section 
that it operates:
    (A) A statement that it will operate the pool as if the person was 
exempt from registration as a commodity pool operator;
    (B) A description of the criteria pursuant to which it will so 
operate the pool;
    (ii) Complies with paragraph (c) of this section; and
    (iii) Provides each existing participant in a pool that the person 
elects to operate as described in paragraph (a)(3) of this section a 
right to redeem the participant's interest in the pool, and informs 
each such participant of that right no later than the time the person 
commences to operate the pool as described in paragraph (a)(3) of this 
section.
* * * * *

0
5. In Sec.  4.14:
0
a. Revise paragraph (a)(8)(i)(D); and
0
b. Redesignate paragraph (a)(8)(iii)(D) as (a)(8)(iii)(E) and add a new 
paragraph (a)(8)(iii)(D).
    The revision and addition read as follows:

Sec.  4.14  Exemption from registration as a commodity trading adviser.

* * * * *
    (a) * * *
    (8) * * *
    (i) * * *
    (D) A commodity pool operator who has claimed an exemption from 
registration under Sec.  4.13(a)(3), or, if registered as a commodity 
pool operator, who may treat each pool it operates that meets the 
criteria of Sec.  4.13(a)(3) as if it were not so registered; and
* * * * *
    (iii) * * *
    (D) Annual notice. Each person who has filed a notice of exemption 
from registration under this section must affirm on an annual basis the 
notice of exemption from registration, withdraw such exemption due to 
the cessation of activities requiring registration or exemption 
therefrom, or withdraw such exemption and apply for registration within 
60 days of the calendar year end through National Futures Association's 
electronic exemption filing system.
* * * * *

0
6. In Sec.  4.24, add paragraph (b)(5) to read as follows:

Sec.  4.24  General disclosures required.

* * * * *
    (b) * * *
    (5) If the pool may engage in swaps, the Risk Disclosure Statement 
must further state:
    SWAPS TRANSACTIONS, LIKE OTHER FINANCIAL TRANSACTIONS, INVOLVE A 
VARIETY OF SIGNIFICANT RISKS. THE SPECIFIC RISKS PRESENTED BY A 
PARTICULAR SWAP TRANSACTION NECESSARILY DEPEND UPON THE TERMS OF THE 
TRANSACTION AND YOUR CIRCUMSTANCES. IN GENERAL, HOWEVER, ALL SWAPS 
TRANSACTIONS INVOLVE SOME COMBINATION OF MARKET RISK, CREDIT RISK, 
COUNTERPARTY CREDIT RISK, FUNDING RISK, LIQUIDITY RISK, AND OPERATIONAL 
RISK.
    HIGHLY CUSTOMIZED SWAPS TRANSACTIONS IN PARTICULAR MAY INCREASE 
LIQUIDITY RISK, WHICH MAY RESULT IN A SUSPENSION OF REDEMPTIONS. HIGHLY 
LEVERAGED TRANSACTIONS MAY EXPERIENCE SUBSTANTIAL GAINS OR LOSSES IN 
VALUE AS A RESULT OF RELATIVELY SMALL CHANGES IN THE VALUE OR LEVEL OF 
AN UNDERLYING OR RELATED MARKET FACTOR.
    IN EVALUATING THE RISKS AND CONTRACTUAL OBLIGATIONS ASSOCIATED WITH 
A PARTICULAR SWAP TRANSACTION, IT IS IMPORTANT TO CONSIDER THAT A SWAP 
TRANSACTION MAY BE MODIFIED OR TERMINATED ONLY BY MUTUAL CONSENT OF THE 
ORIGINAL PARTIES AND SUBJECT TO AGREEMENT ON INDIVIDUALLY NEGOTIATED 
TERMS. THEREFORE, IT MAY NOT BE POSSIBLE FOR THE COMMODITY POOL 
OPERATOR TO MODIFY, TERMINATE, OR OFFSET THE POOL'S OBLIGATIONS OR THE 
POOL'S EXPOSURE TO THE RISKS ASSOCIATED WITH A TRANSACTION PRIOR TO ITS 
SCHEDULED TERMINATION DATE.
* * * * *

0
7. In Sec.  4.34, add paragraph (b)(4) to read as follows:

Sec.  4.34  General disclosures required.

* * * * *
    (b) * * *
    (4) If the commodity trading advisor may engage in swaps, the Risk 
Disclosure Statement must further state:
    SWAPS TRANSACTIONS, LIKE OTHER FINANCIAL TRANSACTIONS, INVOLVE A 
VARIETY OF SIGNIFICANT RISKS. THE SPECIFIC RISKS PRESENTED BY A 
PARTICULAR SWAP TRANSACTION NECESSARILY DEPEND UPON THE TERMS OF THE 
TRANSACTION AND YOUR CIRCUMSTANCES. IN GENERAL, HOWEVER, ALL SWAPS 
TRANSACTIONS INVOLVE SOME COMBINATION OF MARKET RISK, CREDIT RISK, 
FUNDING RISK, AND OPERATIONAL RISK.
    HIGHLY CUSTOMIZED SWAPS TRANSACTIONS IN PARTICULAR MAY INCREASE 
LIQUIDITY RISK, WHICH MAY RESULT IN YOUR ABILITY TO WITHDRAW YOUR FUNDS 
BEING LIMITED. HIGHLY LEVERAGED TRANSACTIONS MAY EXPERIENCE SUBSTANTIAL 
GAINS OR LOSSES IN VALUE AS A RESULT OF RELATIVELY SMALL CHANGES IN THE 
VALUE OR LEVEL OF AN UNDERLYING OR RELATED MARKET FACTOR.
    IN EVALUATING THE RISKS AND CONTRACTUAL OBLIGATIONS ASSOCIATED WITH 
A PARTICULAR SWAP TRANSACTION, IT IS IMPORTANT TO CONSIDER THAT A SWAP 
TRANSACTION MAY BE MODIFIED OR TERMINATED ONLY BY MUTUAL CONSENT OF THE 
ORIGINAL PARTIES AND SUBJECT TO AGREEMENT ON INDIVIDUALLY NEGOTIATED 
TERMS. THEREFORE, IT MAY NOT BE POSSIBLE TO MODIFY, TERMINATE, OR 
OFFSET YOUR OBLIGATIONS OR YOUR EXPOSURE TO THE RISKS ASSOCIATED WITH A 
TRANSACTION PRIOR TO ITS SCHEDULED TERMINATION DATE.
* * * * *

0
8. Effective July 2, 2012, revise Sec.  4.27, as added November 16, 
2011, at 76 FR 71114, and effective March 31, 2012 to read as follows:

[[Page 17331]]

Sec.  4.27  Additional reporting by advisors of certain large commodity 
pools.

    (a) General definitions. For the purposes of this section:
    (1) Commodity pool operator or CPO has the same meaning as 
commodity pool operator defined in section 1a(11) of the Commodity 
Exchange Act;
    (2) Commodity trading advisor or CTA has the same meaning as 
defined in section 1a(12);
    (3) Direct has the same meaning as defined in section 4.10(f);
    (4) Net asset value or NAV has the same meaning as net asset value 
as defined in section 4.10(b);
    (5) Pool has the same meaning as defined in section 1(a)(10) of the 
Commodity Exchange Act;
    (6) Reporting period means the reporting period as defined in the 
forms promulgated hereunder;
    (b) Persons required to report. A reporting person is:
    (1) Any commodity pool operator that is registered or required to 
be registered under the Commodity Exchange Act and the Commission's 
regulations thereunder; or
    (2) Any commodity trading advisor that is registered or required to 
be registered under the Commodity Exchange Act and the Commission's 
regulations thereunder.
    (c) Reporting. (1) Except as provided in paragraph (c)(2) of this 
section, each reporting person shall file with the National Futures 
Association, a report with respect to the directed assets of each pool 
under the advisement of the commodity pool operator consistent with 
appendix A to this part or commodity trading advisor consistent with 
appendix C to this part.
    (2) All financial information shall be reported in accordance with 
generally accepted accounting principles consistently applied.
    (d) Investment advisers to private funds. Except as otherwise 
expressly provided in this section, CPOs and CTAs that are dually 
registered with the Securities and Exchange Commission and are required 
to file Form PF pursuant to the rules promulgated under the Investment 
Advisers Act of 1940, shall file Form PF with the Securities and 
Exchange Commission in lieu of filing such other reports with respect 
to private funds as may be required under this section. In addition, 
except as otherwise expressly provided in this section, CPOs and CTAs 
that are dually registered with the Securities and Exchange Commission 
and are required to file Form PF pursuant to the rules promulgated 
under the Investment Advisers Act of 1940, may file Form PF with the 
Securities and Exchange Commission in lieu of filing such other reports 
with respect to commodity pools that are not private funds as may be 
required under this section. Dually registered CPOs and CTAs that file 
Form PF with the Securities and Exchange Commission will be deemed to 
have filed Form PF with the Commission for purposes of any enforcement 
action regarding any false or misleading statement of a material fact 
in Form PF.
    (e) Filing requirements. Each report required to be filed with the 
National Futures Association under this section shall:
    (1)(i) Contain an oath and affirmation that, to the best of the 
knowledge and belief of the individual making the oath and affirmation, 
the information contained in the document is accurate and complete; 
Provided, however, That it shall be unlawful for the individual to make 
such oath or affirmation if the individual knows or should know that 
any of the information in the document is not accurate and complete and
    (ii) Each oath or affirmation must be made by a representative duly 
authorized to bind the CPO or CTA.
    (2) Be submitted consistent with the National Futures Association's 
electronic filing procedures.
    (f) Termination of reporting requirement. All reporting persons 
shall continue to file such reports as are required under this section 
until the effective date of a Form 7W filed in accordance with the 
Commission's regulations.
    (g) Public records. Reports filed pursuant to this section shall 
not be considered Public Records as defined in Sec.  145.0 of this 
chapter.

    Editorial Note: FR DOC 2012-3390 appearing on pages 11252-11344 
in the issue of Friday, February 24, 2012 is being partially 
republished due to numerous errors.

[FR Doc. C1-2012-3390 Filed 3-23-12; 8:45 a.m.]
BILLING CODE 1505-01-D
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